Fitch Ratings has assigned an 'AAA' rating to the following DeSoto Independent School District, Texas (the district) unlimited tax (ULT) bonds:
--$5 million ULT school building bonds, series 2012;
The 'AAA' rating is based on a guarantee provided by the Texas Permanent School Fund (bond guarantee program rated 'AAA' by Fitch). The bonds are expected to price via negotiated sale the week of July 16, 2012 (pending market conditions). Proceeds will be used to fund facility improvements. Fitch also assigns an 'AA-' underlying rating to the series 2012 bonds.
In addition, Fitch affirms the following ratings for the district:
--$213 million in outstanding ULT bonds at 'AA-';
The Rating Outlook is Stable
The bonds are secured by an unlimited tax , and are secured further by the PSF guarantee.
KEY RATING DRIVERS
DALLAS AREA SUBURBAN DISTRICT: The district benefits from its proximity to the ninth largest metropolitan statistical area in the nation, Dallas-Fort Worth-Arlington. The region is characterized by strong job growth, above average median household income and low poverty rates.
SOFTENING TAX VALUES: Fiscal 2012 taxable assessed valuation (TAV) has dropped to 2006 levels. This is due to a slowdown in construction and the dampening impact of property revaluations on the district's largely residential tax base. Management expects flat to modest fiscal 2013 growth based on recent information from the county appraisal district, which Fitch considers reasonable for the region.
DIMINISHED RESERVE LEVELS: Several years of operating deficits, due largely to reduced property tax revenues, have shrunk the district's general fund balances from previously healthy levels to a still satisfactory 9% of spending.
BALANCED FISCAL 2013 BUDGET: Management reports a balanced fiscal 2013 budget and the intent to rebuild reserves over the next several years to bring the district in compliance with a new, higher minimum fund balance policy.
MIXED DEBT METRICS: Debt is moderate on a per capita basis. However, it remains above average as a percent of market value given multiple years of declining TAV. The district's debt service tax rate is projected to reach the state attorney general's threshold for new debt issuance in the next several years. However, the district does not anticipate the need for new debt in the foreseeable future given ample infrastructure capacity.
WHAT COULD TRIGGER A RATING ACTION
EROSION OF FINANCIAL CONDITION: Reduced financial flexibility, demonstrated by failure to maintain structural budgetary balance, further erosion of the district's reserves, or the inability to meet the attorney general's $0.50 debt service tax rate test for new issuances could apply downward pressure to the rating.
DALLAS AREA SUBURBAN DISTRICT
The district resides 15 miles southwest of downtown Dallas in a suburban area traversed by major transportation corridors. Solid economic characteristics of the district reflect its participation in the Dallas-Fort Worth regional economy. Median household income exceeds the Texas and U.S. averages by 18% and 13%, respectively. The local April 2012 unemployment rate of 7.2% is representative of the region and lower than the U.S. average (7.7%) for the same period.
DECLINING TAXABLE VALUES
The slowdown in building activity beginning in 2009 caused TAV to stall and eventually decline 12.4% from the recent fiscal 2008 peak. Although TAV remains substantial at $2 billion, the gains of earlier years have been eliminated by multiple years of property devaluations. Management anticipates flat to modest fiscal 2013 TAV growth, which Fitch considers reasonable for the region. The tax base is stable and diverse, without material taxpayer concentration.
The revenue shortfall resulting from TAV declines and increased staffing for a larger student body resulted in a string of structural budget deficits. This in turn reduced the district's general fund balance from a high $15.8 million or 29.7% of spending in fiscal 2007 to a still adequate $5.7 million (9.6%) of spending in fiscal 2011 on an unrestricted basis (total of assigned, unassigned and committed funds under GASB 54).
To address ongoing budget challenges and a $1.5 million loss in fiscal 2012 state funding, management has enacted various cost saving measures. Among them include 10%--15% across the board budget cuts, staffing reductions and a hiring freeze. Nevertheless, management estimates an additional $1.5 million drop in fiscal 2012 state funding due to unanticipated enrollment declines. This may result in continued modest use of no more than $500,000 of fiscal 2012 reserves.
Management communicated a newly enacted board policy targeting minimum unrestricted fund balances equal to between 10% and 15% of spending. Officials report a balanced fiscal 2013 budget and expect that fund balances will approach the policy target over the next several years through cost reductions. Among them will include attrition-based savings.
MIXED DEBT METRICS
Overall debt per capita is moderate at $3,955 and high at 9.2% of market value. Principal amortization is below average at 40.6%. The district's debt service tax rate of $.45 per $100 of TAV is expected to approach the state attorney general's threshold for new debt issuance of $0.50 per $100 of TAV over the next several years. However, the district does not anticipate the need for additional debt in the near term given ample capacity of its facilities.
District employees participate in the Teachers Retirement System of Texas (TRS), a cost-sharing multiple employer pension system. Contributions are made by plan members and the state on behalf of the district, eliminating any liability for the district. The district's debt service and pension contributions represent an affordable 17% of fiscal 2011 general government expenditures.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
-- 'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
U.S. Local Government Tax-Supported Rating Criteria
Tax-Supported Rating Criteria
Rebecca Meyer, +1-512-215-3733
111 Congress Suite 2010
Austin, TX 78701
Matthew Dustin, +1-512-215-3727
Steve Murray, +1-512-215-3729
Elizabeth Fogerty, New York, +1-212-908-0526